MetLife’s Brighthouse Financial Spinoff On Track For First Half Of The Year

2016 was a busy year for MetLife (MET). Outside of their normal operations, the mammoth insurance company won a huge lawsuit versus the US Government avoiding the dreaded ‘systemically important’ designation. They fired Snoopy and in related news to this site, the company announced the spinoff of part of its retail operations into a standalone entity. The new company will be called Brighthouse Financial and according to the Form 10, will be ‘a major U.S. life insurance and annuity company, with $240 billion of total assets and approximately 2.6 million insurance policies and annuity contracts in-force as of June 30, 2016. Through a diverse network of independent distributors, Brighthouse Financial will offer a simplified set of accumulation and protection products.’ The parent company plans on transferring the following entities into the spin:

MetLife Insurance Company USA, General American Life Insurance Company, Metropolitan Tower Life Insurance Company and several subsidiaries that have reinsured risks underwritten by MetLife Insurance Company USA.

The new company will be led by Eric T. Steigerwalt, who is currently the EVP of MetLife’s U.S. Retail business. Before going any further, lets first answer the real, burning question on everyone’s mind: how did they come up with the new name?

Our optimistic outlook on what we will create for people’s financial futures, coupled with our guiding principles of simplicity and transparency, are captured in our name, Brighthouse

Uh sure. Rather benign choice, but I guess “House Filled With Piles Of Money” would have been a bit too optimistic of an outlook for people’s financial futures.

The company first announced separation plans in January of 2016 and at the time, the company mentioned that it was still determining the structure of the transaction. The options (as usual) were an IPO, a spinoff or an outright sale. With the filing of its initial Form 10 in October, it seems the company is leaning towards the spinoff choice and the spin will include at least 80% of its shares. Shortly before the filing, CFO John Hele noted that ‘a spin can generally happen even if the IPO markets are a bit choppy…Had we planned this a year ago, and were scheduled for the first quarter this year [2016], it would have been very tough to do an IPO.’

While most press releases tout the reason of investor focus (and that does show up here as well), MetLife’s Chairman and CEO Steve Kandarian also highlighted the role of regulations behind this decision:

At MetLife our goal is to create long-term value for our shareholders and deliver exceptional customer experiences. As a result of our Accelerating Value strategic initiative, MetLife has been evaluating opportunities to increase sustainable cash generation and is directing capital to businesses where we can achieve a clear competitive advantage and deliver a differentiated value proposition for customers. This analysis considers the regulatory and economic environment in each market where we do business. We have concluded that an independent new company would be able to compete more effectively and generate stronger returns for shareholders. Currently, U.S. Retail is part of a Systemically Important Financial Institution (SIFI) and risks higher capital requirements that could put it at a significant competitive disadvantage. Even though we are appealing our SIFI designation in court and do not believe any part of MetLife is systemic, this risk of increased capital requirements contributed to our decision to pursue the separation of the business. An independent company would benefit from greater focus, more flexibility in products and operations, and a reduced capital and compliance burden…

This separation would also bring significant benefits to MetLife as we continue to execute our strategy to focus on businesses that have lower capital requirements and greater cash generation potential. In the U.S., it would allow us to focus even more intently on our group business, where we have long been the market leader. Globally, we will continue to do business in a mix of mature and emerging markets to drive growth and generate attractive returns.”

Last October, Barron’s highlighted Sandler O’Neill’s analysis of the proposed breakup which cited three potential reasons for the spin, two of which were clearly regulatory related:

1) To assist its efforts to redesignate as not a nonbank systemically important financial institution (SIFI) should the government’s appeal of the favorable ruling succeed. Redesignation occurs annually, and should the company successfully separate a business with roughly 25% of overall assets, this should serve to only further enhance its argument that it is not a nonbank SIFI and should not be designated as such.

2) It enables the company to separate a business that has historically had rather volatile financial results and leave MetLife as a business with a more reliable stream of earnings. We would also remind investors that the company announced a $1 billion expense reduction plan by 2019 when it reported second-quarter earnings.

3) As much as separation is about trying to shed its nonbank SIFI designation, we believe it is also about reducing exposure to the Department of Labor fiduciary standards rule, which goes into effect in April 2017.

The Fiduciary Rule seems endangered and with the company’s court victory and Dodd-Frank seemingly under attack, the SIFI reason may go away as well. During the most recent conference call, the company was asked if the spin was still on track. The answer was yes, but the real question no one asked is if it still makes sense to pursue Brighthouse’s spinoff if these regulatory pressures no longer exist. The answer is probably yes, because while things look better now, there really isn’t much clarity in either the short or long term.

The new company is expected to trade under the ticker ‘BHF’ and according to CEO Steve Kandarian, the timing for the spin remains the first half of 2017. We will keep you updated if the plans or structure change.

Disclosure: Author holds no position in any stock mentioned.